Business context and reporting period
This is Meta Financial Group, Inc.’s unaudited Form 10-Q for the fiscal first quarter ended December 31, 2019 (three months ended; year-over-year comparison is to December 31, 2018). The filing metadata names Pathward Financial, Inc., but the filing itself identifies Meta Financial Group, Inc. and its subsidiary MetaBank as the registrant.
Financial performance and condition
- Revenue and earnings: Total revenue was $102.1 million, up 4% from $98.0 million. Net income attributable to the parent was $21.1 million versus $15.4 million; diluted EPS was $0.56 versus $0.39.
- Net interest and margins: Net interest income rose 7% to $64.7 million. Net interest margin was 4.94%, up 34 basis points; tax-equivalent NIM was 4.99%, up 23 basis points. Average cost of funds declined to 1.01% from 1.14%.
- Credit provision and expenses: Provision for loan and lease losses fell to $3.4 million from $9.1 million. Noninterest income was $37.5 million, slightly below $37.8 million; noninterest expense increased 2% to $75.8 million. The effective tax rate was 2.97%, versus a tax benefit and negative 11.56% rate a year earlier.
- Cash flow: Operating cash flow was $135.5 million versus $52.2 million; investing cash outflow was $94.5 million versus $299.3 million; financing cash outflow was $15.5 million versus $311.6 million. Cash and equivalents ended at $152.2 million, up from $126.5 million at September 30, 2019.
- Balance sheet and funding: Total assets were $6.18 billion, essentially unchanged from September 30. Loans and leases were $3.59 billion gross, down 2%; loans held for sale increased to $264.3 million. Deposits were $4.52 billion, up 4% from September 30, excluding $289.0 million classified as deposits held for sale. Total borrowings declined to $407.1 million from $861.9 million, mainly due to lower short-term borrowings. Stockholders’ equity was $837.1 million.
- Credit quality and capital: Nonperforming assets fell to $29.8 million, or 0.48% of assets, from $56.5 million, or 0.91%, largely after the sale of foreclosed property. Nonperforming loans and leases were $24.0 million; the allowance was $30.2 million. The Bank remained above regulatory well-capitalized thresholds; its total capital ratio was 12.90% and Tier 1 leverage ratio was 9.70%.
Material changes and unusual items
- Net interest income and earnings improved, chiefly from loan growth and a shift in earning assets toward higher-yielding lending portfolios. Average loans and leases increased $614.8 million year over year, while average investments declined $659.1 million.
- The company recorded a $5.0 million loss on the sale of agricultural foreclosed property, partly offset by $1.1 million of deferred rental income; the transaction’s net impact was a $3.9 million loss. Foreclosed and repossessed assets fell to $1.3 million from $29.5 million.
- MetaBank agreed to sell substantially all of its Community Bank division to Central Bank. Assets and liabilities designated for sale were reclassified; the transaction was expected to close in fiscal Q2 2020, subject to approvals and closing conditions. The transfer to held-for-sale status reduced the provision by $1.8 million. Remaining Community Bank loans were expected to be retained and serviced under an agreement.
- The company repurchased 899,371 shares during the quarter at an average $34.17 per share and authorized a new program for up to 7.5 million shares through December 31, 2022.
- Adoption of lease accounting guidance on October 1, 2019 added $27.4 million of right-of-use assets and $28.6 million of lease liabilities; management said the capital-ratio impact was immaterial.
Outlook, risks and contingencies
- Management expected NIM to continue expanding as it grows and optimizes loans and leases and leverages deposits from its payments divisions. This is management commentary, not quantified earnings guidance.
- Key risks include interest-rate and funding sensitivity, credit losses, reliance on payments-related deposits and wholesale funding, execution and approvals for the Community Bank sale, and regulatory, technology, third-party and litigation risks. Management cautioned that low recent credit losses may not continue.
- Unfunded loan commitments were approximately $1.04 billion. A $25 million unused line of credit was available; management believed funding sources would meet foreseeable liquidity needs.
- Disclosure controls were deemed ineffective at December 31, 2019 because a previously identified material weakness at Crestmark remained under remediation. Deficiencies involved IT access, program change controls and review procedures for loan accounts and client-record changes.
- Legal matters include a $4.0 million claim by Card Limited, for which the court ruled in Meta’s favor but appeal remained possible; the filing says a possible loss range could not be estimated. MetaBank also pursued a claim for just over $1.6 million in unearned insurance premiums. An Ohio Valley Bank claim alleging more than $3.0 million in damages had an accrual established; the amount of that accrual is not stated here.
Important facts for investors to verify
- Confirm the registrant and reporting period: this source is a Meta Financial Group filing for fiscal Q1 2020, despite the Pathward metadata.
- Check whether the Central Bank sale closed as expected and review final transferred loan, deposit and employee balances and any resulting gain or loss.
- Track remediation of the Crestmark material weakness and whether management later concluded disclosure controls were effective.
- Assess whether the low effective tax rate and earnings benefit from solar investment tax credits are repeatable; management said future credits may vary.
- Monitor loan performance, allowance adequacy, deposit mix and borrowings, including the substantial unfunded commitments and payment-processing-related funding fluctuations.
- Review subsequent disclosures on the cited legal matters, share repurchases and the pace of the new authorization.